Workers face pay squeeze

UK workers face a continuing squeeze on real pay over the next 12 months, as organisations cut costs amid continuing economic uncertainty, according to new research.

The Hay Group report, Reward in 2012, is based on forecast data from reward professionals in more than 180 organisations, representing over half a million UK employees.

Pay forecasts for 2012 reflect faltering confidence amongst UK businesses. Two thirds of respondents state that the worst of the recession is not over for their organisation. Almost a third expect to miss performance targets this year.

Organisations are keeping a tight rein on pay increases as a result – leading to concerns over the impact on workforce morale.

Adam Burden, reward information consultant at Hay Group comments: “As ongoing instability hits business confidence, a continued squeeze on pay is inevitable. Our research reveals the demoralising effect pay uncertainty is having on employee morale.”

However, there is good news for some employees, as the majority of private companies plan to lift the pay freezes implemented during recession.

Only seven per cent believe the worst of the crisis is over. By contrast, 61% of firms experienced an upturn in business performance last year.

Almost a third (32%) of firms expect below target performance this year – up from less than 23% in 2011.

As a result of faltering business confidence, close to half (43%) of organisations report pressure to decrease pay in order to control costs.

Despite this, the strong majority (85%) of organisations actually plan to increase pay in 2012 – but at a rate well behind inflation.

Around three quarters (75%) of private sector organisations, and some 90% of public sector organisations, will increase pay – by a median of 2.8%. The Consumer Price Index (CPI) currently stands at 4.2%.

And as inflation continues to erode take-home pay, organisations report a detrimental impact on workforce morale. Over half (51%) of respondents agree that uncertainty around pay has resulted in a downturn in employee engagement.

Falling business confidence is also affecting the prospects for bonus payouts in the coming year.In 2011, almost three quarters (73%) of organisations with bonus plans forecast payments to be on or above target. This year, the proportion has fallen to 60%.

Pay freezes begin to thawHay Group’s report offers a ray of hope for some workers, however: the lifting of pay freezes in the private sector.

Over a fifth (21%) of private sector organisations implemented freezes in 2011. In 2012, over half (58 per cent) anticipate lifting these.

The outlook is starker in the public sector, where more than two thirds (67%) of organisations froze pay in 2011. Only a third (34 %) will lift freezes this year.

Burden said: “Organisations must take an open and transparent approach to pay to ensure that productivity doesn’t suffer. Engaging employees and communicating reward policy will be key to maintaining motivation during the difficult year ahead.”